New Tax Laws for Virtual Currencies

This month, the IRS further clarified its position on the treatment of cryptocurrencies with a new revenue ruling and draft form. These developments, along with the letters sent out to specific taxpayers over the summer, indicate that the IRS is paying more attention to unreported and under-reported virtual currency transactions. Learn about these new rules and how to help your clients through them in this article.

What are the new rules?

According to the new draft of Schedule 1, taxpayers making adjustments to income are required to answer Yes or No to this question: “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”. In an email sent to tax preparers earlier this week, the IRS specified that there is no need to file a Schedule 1 solely to answer this question.

In addition to the guidelines established in IRS Notice 2014-21, the new Revenue Ruling 2019-24 released on October 9 clarified what kinds of events create tax consequences, specifically “airdrops” and “hard forks.” A hard fork is a protocol change to the distributed ledger of a legacy cryptocurrency that results in either the creation of a new currency or a new distributed ledger. In conjunction with a new cryptocurrency’s establishment, the taxpayer may receive an “airdrop” of coins/units. When this is the case, RR 2019-24 notes that a taxpayer has made reportable gross ordinary income.

Who will be affected?

As cryptocurrencies are becoming more mainstream, you may notice a lot more of your clients asking whether their virtual wallets affect their tax returns. Because the IRS has categorized cryptocurrencies as property and treats their acquisition and disposition accordingly, taxpayers who are merely holding on to virtual currencies have nothing to report. Any taxpayer who has received, sold, exchanged, sent, or acquired any cryptocurrency during the tax year must now report those transactions by answering the question on Schedule 1 in addition to the other appropriate schedules and forms.

How should you report your clients’ specific situations?

There is no stereotypical digital currency user, so you could see a diverse number of tax situations amongst your clients as cryptocurrencies catch on with:

  • Independent contractors
  • Wage-earning employees 
  • Service-providers
  • Employers
  • Shoppers who pay in virtual currency

These tax situations and how to treat them during tax preparation are addressed in detail on the updated IRS Virtual Currency FAQ.